Let’s not kid ourselves that kirana stores will survive

My wife is the one who mostly does our grocery shopping. Till about two years ago, the word Choice was one that was frequently heard at home. Choice is the local kirana store, run by a Malabari Muslim, the enterprising trading community that operates many of the neighbourhood grocery stores in Bangalore.

Choice is less than 200 metres from our place, and if you didn’t want to walk that distance, you just had to call Choice, and they would deliver whatever you wanted, even a single order of a bread loaf or a dozen eggs. If you told the delivery boy that you would pay later, he would happily consent.

Today, I barely hear the word Choice. My wife – sometimes with neighbourhood friends – prefers to take an autorickshaw to go to More or Total or Spencer’s, all of which are about 2 km from where we live. Choice is more expensive for just about everything, she says.

She is particularly excited about one of the chains (l don’t want to be seen to be promoting it, so I won’t name it). It’s given her a loyalty card on which she keeps accumulating points. It gives her a bunch of discount vouchers at the beginning of each month, many of which she finds useful. And it has a scheme where if you buy groceries worth Rs 2,000 or Rs 3,000 a month, you get some item free. Two months ago, she received a big red bag, and last month she got a kadai.

Last heard, Choice is still there. But if the store’s premium customers abandon it the way I see them doing, I don’t think it can survive for long.

Mass extinction

As I see it, the kirana store demise has already started. Their businesses started declining with the entry of the big domestic grocery and hypermarket chains, and the September 14 announcement of permitting foreign investment in retail can only accelerate this trend.

In an insightful article that appeared in the Outlook magazine in December last year about the dramatic transformation brought by supermarkets in Britain, Peter Wilby, a former editor of the Independent on Sunday and New Statesman of the UK, wrote: “Independent retailers of food have nearly gone extinct. Butchers, fishmongers, greengrocers and independent bakeries have seen a 90 per cent decline in their numbers since the 1950s. There are fewer than 4,000 greengrocers left in the whole of Britain…The big chains have moved beyond foodstuff, beverages and household goods into clothing, medicines, petrol, banking, newspapers, magazines and insurance. In doing so, they have become threats to small shops and service outlets of all kinds. In many areas, the only surviving small shops are run by people of Asian origin who, as well as having strong family support structures that allow them to compete with the supermarkets’ long hours and low costs, can supply the specialized needs of minority communities. The New Economics Foundation think-tank has described the decline of the independent retailer as “something equivalent to a mass extinction in nature”.”

I don’t want to pass a value judgment yet on such mass extinctions. May be that’s a price we have to pay for progress. But a few things must be noted of the Indian experience with organized retail. Choice’s likely demise is not because of super-efficient operations by the big retail chains. Far from it. Every major grocery chain is bleeding profusely. My wife gets attractive deals from them thanks to these chains being subsidized by the corporate groups that run them. Most of these groups have very deep pockets; some have received large external funding.

But no pocket is infinitely deep. Which is why the same Kishore Biyani who was virulently against foreign investment in retail just five years ago, is now rejoicing the decision to allow such investment. He, just as other domestic retail chains, needs foreign capital to bail him out.

Dearer veggies?

I had a discussion last week with Sunil Chandran, who was till a few months ago the chief operating officer for supermarkets in Aditya Birla Retail, which runs the More chain. He says (and these views are purely personal) there are three big reasons why organized retail does not make money. One is the cost of real estate. These stores typically operate out of better buildings along the bigger roads, unlike kirana stores that operate out of older buildings on small streets. Second is the cost of people. There’s a constant churn of store staff because of difficult timings, long hours, weekend work. And new hires will always come at higher costs. The kirana stores are run typically by family folk who do not mind the difficulties.

The third reason is that 60-70 per cent of the items in a store are packaged, branded items that have to be sold at MRP (or below that during promotions), and where the margins are low. Most of the remaining 30-40 per cent consists of fruits, vegetables and dry groceries (grains, dals, etc). “Internationally, that’s where big grocery chains make money. But in India, that’s a space with lots of competition, thanks to the kiranas and pushcarts. So you can’t make much money there either,” he says.

Foreign investment cannot do anything about the first two challenges, in fact they might only make these problems worse. The third is where it can. With their super deep pockets, they can possibly keep their operations going long enough to ensure the extinction of much of their kirana and pushcart competition, and then price fruits, vegetables and dry groceries at levels that make the stores profitable. As many who have traveled to the US and Europe have noticed, fruits are far too expensive for most households. “In the long run, competition has to come down (for organized retail to survive),” says Chandran.

McKinsey Myth

In 1997, Kito de Boer and Amit Pandey of consulting firm McKinsey wrote a research paper titled `India’s sleeping giant: Food’, where they made the following statement: “Cumulative waste on the farm, in procurement, and at the retailer is worth an estimated $6.7 billion, the equivalent of 40 per cent of the total production of fruit and vegetables. Wastage of wheat, at 8 per cent, is less severe, but still high given that this is a relatively nonperishable item.”

Since then, the “40 per cent wastage” has stuck to the minds of many Indians. It looks huge, and it is argued that if someone (read FDI in retail) can bring the money required to “modernize the supply chain”, we should welcome them; it will help to lower overall costs. Unfortunately, what McKinsey did not do in that 1997 paper was bring a global perspective to this waste.

That is something that has happened in recent times. Last month, the Natural Resources Defense Council, an international nonprofit environmental organization, released a research paper written by staffer Dana Gunders titled `Wasted: How America Is Losing Up to 40 Percent of Its Food from Farm to Fork to Landfill’, a paper that was reviewed before publication by several peers including a faculty of the Harvard Business School. Gunders uses data from a 2011 study by the United Nations’ Food and Agriculture Organization to show that the US, Canada, Australia and New Zealand together lose 20 per cent of their fruits and vegetables on the farm (production losses), 3 per cent of the remaining gets lost in post-harvest handling and storage, 1 per cent of the balance gets lost in processing and packaging, and 12% of what comes to distribution and retail gets lost there. I did the math and found that almost 33 per cent of the total fruit and vegetables production gets lost from the farm to the retailer, not dramatically different from India’s 40 per cent (I’m assuming that McKinsey and Gunders methodologies have been more or less similar).

In the case of grains in the four developed countries, the respective loss percentages were 2, 2, 10, and 2. The math will tell you that more than 15 per cent of grains get lost from the farm to the retailer. India looks positively good in comparison, given McKinsey’s estimate of 8 per cent loss for wheat.

In other words, despite the seeming lack of supply chain infrastructure, the Indian system is already working reasonably well. And that can be seen also from the views of people who know something about these systems. Sunil Chandran says very categorically that there are very little efficiencies that one can squeeze out of the supply chain.

Prof Abhijit Sen, member of the Planning Commission and formerly the chairman of the government’s high level committee on long term grain policy, noted in an interview to Mint newspaper last month that Indian players had put in a lot of money into improving agricultural supply chains, but most eventually pulled back. “We have high losses (in the supply chain), but we have also had a history of exaggerating losses on the supply chain. If the actual losses were that high, the returns on investing in cold chains would have also been high. People are underestimating the jugaadin the existing economy. The proportion of the Indian consumer’s spending on produce that the farmer gets is higher than what the American farmer gets out of the American consumer’s spending. The processing, packaging and the infrastructure you’re talking about is what adds to the cost of the produce for the consumer,” he said.

Consumer vs Citizen

Before I wind up this already long blog, I must get back briefly to Peter Wilby’s article in Outlook, because it enables us to better understand the whole new world we may be entering.

Wilby says British families today drive more to shop because supermarkets are situated far from residential areas, making private ownership of a car a necessity and increasing traffic congestion. He says small producers that are unable to sell to at least one of the big chains suffer, and indicates that large numbers have suffered. He says previously many products, particularly agricultural products like fruits, came in numerous varieties, but these have been replaced by a handful that look good (not necessarily taste good) and can be transported without bruising.

He says supermarkets “have removed the small, casual, but sometimes highly meaningful, human encounters — which may occur in shops or on the way to them — that help bind a community together. According to a US study, the opening of a big supermarket is followed by a decline in the numbers taking part in campaigns, church services, charitable activities and even voting turnouts. Tesco, Asda (a Wal-mart subsidiary) and other chains have reduced shopping to a matter of speed and price comparison. Even the most rudimentary of human contact is reduced by the advent of self-service checkout counters.”

Wilby concludes with the following: “The clinching argument offered by retail chains has always been that they provide what the consumer wants. And, in a sense, they do. But what people want as consumers may not be what they want as producers, business owners, parents, motorists, pedestrians or, above all, as citizens.”

I think foreign investment can potentially bring value, but all of that value could be undermined if the retail market, which is an Adam Smithian ideal today, turns into an oligopolistic monster, which it doubtless will if left unregulated. This is the reason why even New York – arguably the greatest city on Earth – has resisted so much the entry of Wal-mart. The question we need to debate is, can we regulate the sector. And if so, how.

DISCLAIMER : Views expressed above are the author's own.

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Sujit is the business editor, Bangalore, in The Times of India. He has been with TOI for 17 years, starting as an Assistant Editor on the Edit Page. He has been tracking technology for over a decade, and intensively tracking it for the past four years. He writes regularly for The Times of India on enterprise and consumer technologies, new trends in them, and how these are impacting businesses and people. He has been particularly focused on technology innovations being done in India, and in identifying Indian companies, including start-ups, that are doing extraordinary technology work. Besides being in charge of the business pages of TOI in Bangalore, he has been overseeing the weekly technology page in TOI, Bangalore, and actively contributing to it.

Sujit is the business editor, Bangalore, in The Times of India. He has been with TOI for 17 years, starting as an Assistant Editor on the Edit Page. He has . . .